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Fitch Affirms Islamic Development Bank at 'AAA'; Outlook Stable
June 13, 2017 / 2:07 PM / 6 months ago

Fitch Affirms Islamic Development Bank at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, June 13 (Fitch) Fitch Ratings has affirmed the Islamic Development Bank's (IsDB) Long-Term Issuer Default Rating (IDR)'s at 'AAA' with a Stable Outlook. The Short-Term IDR has been affirmed at 'F1+'. The trust certificates issued by IDB Trust Services Ltd and guaranteed by IsDB have also been affirmed at 'AAA'. The ratings reflect the intrinsic strengths of IsDB; in particular its 'excellent' capitalisation, low solvency risks and 'excellent' liquidity compared with other regional multilateral development banks (MDBs). It is important to note that the IsDB has changed its financial year end from Lunar Hijri to Solar Hijri (equivalent to Gregorian calendar) and so the end-2016 financial statements used in this rating assessment are based on a 15-month financial year. KEY RATING DRIVERS The ratings are underpinned by the intrinsic strengths of IsDB; most notably its 'excellent' levels of capitalisation. At 46.2% (end-2016), IsDB's equity-to-assets ratio is far above the 25% 'excellent' threshold as outlined in our supranational rating criteria and is one of the strongest in the universe of MDBs. Capitalisation has eroded in recent years (vs. 70.7% at end-October 2010) and leverage has risen (114.2% end-2016 vs. 37.2% at end-October 2010), in line with the bank's steady growth in financing operations. The bank further loosened its leverage policy last year, increasing the internal limit for debt/equity ratio to 125% from 100%. In Fitch's view, leverage will continue to increase in coming years, but will remain below 'AAA'-rated peers' levels. In terms of risks, Fitch assesses IsDB overall as 'low risk'. Overall loan performance has been strong, with the bank's non-performing loan (NPL) ratio at just 2.8% at end-2016, despite exposure to countries going through deep political troubles. However, the bank has large exposures to sovereigns in poorly rated countries, which translate into an average rating of loans of 'B+'. The bank's risk concentration is assessed at 'low risk', with the five-largest exposures accounting for 31% of total banking exposure. Equity risk is 'low' with equity participations accounting for 12% of total banking exposure, which Fitch views as a manageable risk for IsDB as it remains contained activity and is expected to continue to decline in the coming years. The bank's risk management is conservative overall, and as such is assessed as 'strong' with many prudential rules in place, including limiting exposure to a single country, a single sector and a single investee as a proportion of the portfolio. However, the provisioning of impaired assets is less conservative than other 'AAA' rated MDBs. Liquidity is overall assessed at 'aaa', as liquidity buffers are 'excellent' and are in line with 'AAA' rated peers. The quality of the bank's treasury assets, however, remains a weakness, as just 12% of treasury assets are rated 'AA-' or above, a ratio that is considerably below 'AAA' peers'. This risk is mitigated though by the high share of the treasury asset portfolio that is rated investment grade, as well as IsDB's excellent access to capital markets. IsDB's overall business environment is assessed as 'medium risk', comprising both the bank's business profile and operating environment risks. The bank's size of the non-sovereign sector (19.9% of total banking exposure), size of banking portfolio (USD18.6 billion) and strategy are all assessed as 'medium risk', in line with Fitch's supranational criteria. The bank's quality of governance, however, is assessed as 'low risk' to reflect the bank's experienced staff and prudential risk framework, which Fitch expects the bank to maintain over the coming years. The credit quality of IsDB's countries of operations is assessed as 'high risk' owing to the bank's continued lending to a number of sub-investment grade countries, with just two of the bank's top 10 largest exposures being rated investment grade by Fitch. Our assessment for income per capita in countries of operations is now based on World Bank Income Group classification, which shows that over half of IsDB's countries of operations are ranked as either 'low income' or 'lower middle' income' and therefore scores a 'high risk' in our assessment. The political risk and business climate in the bank's countries of operations is assessed using the World Bank Governance Indicators and, for IsDB, is 'high risk'. Overall, IsDB's business environment is assessed as 'medium risk', with no uplift made to our solvency assessment. Capacity to support is not as strong as some other regional MDBs; the average rating of key shareholders, consisting of Saudi Arabia (A+/Stable), Libya, Iran, Nigeria (B+/Negative) and UAE, is 'BB+' and there remains no callable capital by countries rated 'AAA'/'AA+'. Shareholders have consistently demonstrated their propensity to support the bank through regular inflows of fresh capital and, despite the moderate size of the bank's balance sheet, IsDB is an important tool to channel sharia-compliant financing to member states. RATING SENSITIVITIES Pressure on the ratings would arise from a pronounced weakening of asset quality or unexpected deterioration of capitalisation and leverage. Deterioration in the quality of IsDB's treasury asset portfolio could lead to pressure on the bank's intrinsic rating and, in turn, IDR. KEY ASSUMPTIONS Fitch assumes that the member countries will participate in the ongoing capital increase and that lending growth will remain moderate over the coming years. Contact: Primary Analyst Nicholas Perry Analyst +44 203 530 1795 30 North Colonnade London E14 5GN Secondary Analyst Vincent Martin Director +44 203 530 1828 Committee Chairperson Eric Paget-Blanc Managing Director +33 144 299 133 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Sources of information - The sources of information used to assess these ratings were IsDB financial statements, and other information provided by IsDB. Additional information is available on Applicable Criteria Supranational Rating Criteria (pub. 18 May 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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